July Employment Report Has Mixed Implications for Fed

The July Employment Report does not provide a clear picture of whether further Fed easing is needed.  Decent Payroll growth, a steady Unemployment Rate and an uptick in wage inflation argue against it.  But, a dip in the Average Workweek shows either a cautionary pullback or the initial moves by companies to retrench.

The +164k m/m increase in July Nonfarm Payrolls was in line with the average pace seen in H119 (165k -- down from 172 after downward revisions in May and June).  So, it is consistent with about 2.5% Real GDP Growth.  Both the Payroll and estimated GDP rates of increase exceed the Fed's estimates of the paces needed to keep the Unemployment Rate steady.  The reason why the July Unemployment Rate was steady at 3.7% was because of a further increase in the Labor Force Participation Rate -- a positive for the potential economic growth rate and consistent with the jump in the July Conference Board Consumer Confidence Index.  It argues against a Fed tightening, but not necessarily for an easing since it just accommodates the already above-trend job growth.  The above-trend job pace was clearer in the broader U-6 measure of labor market slack, which includes people marginally attached to the labor market and part-timers for economic reasons.  It fell to 7.0%, a new low for the move down and lowest level since late 2000.

The composition of July Payrolls is consistent with some developments seen in recent data but contrary to others.  /1/ Construction jobs in both residential and private non-residential sectors improved modestly.  But, construction jobs in the public sector fell.  These moves are a little better than the private construction spending and consistent with the weakness in public construction spending seen in yesterday's report.  /2/ Manufacturing jobs sped up, contrary to the implication of yesterday's Mfg ISM.  A decline in the Mfg Workweek was more consistent with the Mfg ISM, but even that decline was concentrated in supervisory workers.  Non-supervisory/production workers' average workweek was only slightly lower and their Total Hours Worked were flat.  /3/ Retail jobs continue to fall, once again reflecting the shift toward on-line shopping.

The 0.3% m/m increase in Average Hourly Earnings was stronger than suggested by calendar considerations.  It is the 3rd above-trend 0.3% m/m increase in a row and could signal that news of the death of the Phillips Curve was premature.